Francesca Rayneau, Director of Calculus, looks at the reasons why she thinks venture capital trusts present an opportunity as the financial year draws to a close.
As the financial year draws to a close, and with HMRC showing a 50% increase in people paying at least 40% income tax in 2022-23 compared with 2019-20, investors find themselves needing effective tax planning now more than ever.
One such opportunity lies in Venture Capital Trusts (VCTs). Historically a lesser-known product, VCTs are now high in demand with £1.08bn invested in the 2022/2023 tax year. This shows investors are keen to back early stage, innovative UK based companies.
VCTs are investment companies listed on the London Stock Exchange and designed to provide private equity capital to small, high-growth potential businesses in the UK. By investing in a VCT, you not only get exposure to a portfolio of dynamic and emerging companies but also enjoy substantial tax reliefs offered by the UK government as an incentive for supporting these businesses.
VCTs serve as a viable option for investors who have already maximized their contributions to pensions and ISAs and are seeking additional tax-efficient investment avenues.
Here are the top five reasons why investing in a VCT could be a smart move:
Growth potential: VCTs primarily invest in smaller, VCT-qualifying companies that are not listed on the main market of the London Stock Exchange. These companies often have the potential to grow much faster than their larger, listed counterparts, providing investors with a unique opportunity to participate in their growth journey. Remember, investing in smaller companies does carry higher risk, so the potential for higher returns must be balanced against this.
Tax efficient investing: High earners have been hit by frozen allowances, and the tax free allowance for dividends will be slashed to £500 from 2024. VCT investments come with several tax advantages. When you invest in new VCT shares, you can claim up to 30% upfront income tax relief on your investment (up to £200,000 per year), provided you hold your VCT shares for at least five years. Additionally, any capital gains from selling your VCT shares are not subject to capital gains tax, and dividends received from VCTs are tax-free.
Diversification: The performance of smaller companies often follows a different investment cycle compared to larger, mainstream markets. This characteristic can add valuable diversification to your overall investment portfolio, potentially reducing overall risk.
Supporting British innovation: By investing in a VCT, you’re directly contributing to the growth and success of innovative, smaller companies in the UK. This not only supports job creation and economic prosperity but also aligns your investment with the broader goal of nurturing domestic entrepreneurship and innovation.
Strategic investing: VCTs can be a strategic addition to your existing investment portfolio. Especially for those looking to complement their pension plans or other long-term investments like Individual Savings Accounts (ISAs), VCTs offer a different risk-reward profile and can be particularly useful for retirement planning, especially if pension limits are close to being breached.
Autumn Statement brought new sense of optimism for VCT investors
The recent Autumn Statement delivered by Chancellor Jeremy Hunt has brought a renewed sense of optimism and stability for investors in VCTs. The decision to extend the VCT and Enterprise Investment Scheme (EIS) sunset clause to April 2035 marks a significant milestone. Initially set to expire in April 2025, this extension alleviates the uncertainty that has surrounded these schemes, a factor that might have previously deterred potential investors.
This announcement not only secures the future of VCTs but also reinforces their role as a vital component in the funding ecosystem for UK start-ups. For investors, this means a more confident environment to invest in VCTs, combining the potential for attractive returns with significant tax advantages, and the opportunity to be part of the UK’s thriving innovative and entrepreneurial spirit.